A program from the FHA to help pay for home repairs is gaining in popularity. Special FHA rehab mortgage loans provide buyers with money based on the future value of the property after repairs and improvements are completed. As a result, they're ideal for buying "fixer-upper" homes.

The Federal Housing Administration (FHA) is enjoying dramatically increased business activity these days, as other mortgage lenders tighten their purse strings. Not only is the agency insuring traditional mortgage products, but it's also offering streamlined loans that are custom designed for those buyers who want to do home repair and home improvement projects.

FHA Rehab Mortgages

These FHA rehab mortgage loans aren't new to the market, but they've been flying under the radar of consumers for years, mainly because it was generally easier to take out home equity loans. As home prices accelerated, buyers who watched their equity skyrocket could routinely borrow against it to finance various home improvements. But deteriorating real estate prices have erased equity for millions of Americans, and banks have curtailed home equity loans. During the current housing and credit crisis, these FHA rehab mortgage products are attracting customers in growing numbers. The FHA provided about twice as many rehab mortgages in 2008 as it did in the previous year. The loans are great for people who buy foreclosures in neglected condition and then fix them up.

Home improvement help

Here's how the streamlined rehab mortgage program works:

FHA 203(k) mortgages, also known as rehab loans, allow buyers to get an FHA mortgage with extra cash automatically included to help pay for repairs, improvements, and rehab. When the homebuyer takes out a purchase loan, the FHA includes up to $35,000 for repairs and upgrades recommended by appraisers and professional home inspectors. These streamlined loans are a boon for sellers as well as buyers, because the seller can offer a house "as-is," while the buyer is able to get enough money to pay for the home, plus the needed repairs to bring it up to code, or make it more livable.

In a tough economic climate, that kind of assistance can make a huge difference, because sellers can't afford to do extensive home repairs, but may be desperately in need of selling a property to avoid foreclosure. Buyers who have a rehab mortgage can get a great deal on a house and then immediately enhance their equity, which also boosts the collateral value of the house to give the lender added protection from losses.

Home repair heaven

Home improvements done under the streamlined FHA program don't require the involvement of a general contractor, so do-it-yourself buyers with construction expertise can often do the work all by themselves. No inspection is needed for home repairs that cost less than $15,000, and eligible projects include roof repairs, plumbing, electrical wiring, painting, remodeling of kitchens, or replacement of old appliances or heating and air conditioning systems.

Published on January 24, 2009